News, ideas and a software CEO's thoughts from 25 years in the industry.

The Real Challenge Today for Small Business

In a recent Wall Street Journal article (1/19/17), columnist Ruth Simon points out that small businesses are slow to hire. As it turns out, statistics show that the median small business adds fewer than one full-time position a year, despite being thought of usually as “the engine of U.S. job growth.”

In 2015, about one in six small firms lost one FTE (full-time equivalent) and only one in five added more than two, according to J.P. Morgan Chase Institute, which analyzed payroll records for 45,000 small firm customers.

The truth is: the lion’s share of small business job gains in the U.S. comes from new businesses being formed, not the expansion of older small firms. This, in a nutshell, synopsizes the challenge for American small business today: most small firms employ just a few workers and struggle with unpredictable results.

The article goes on to quote Scott Stern, a professor at M.I.T. who notes that “There is a great disconnect between the belief that entrepreneurship in general is a driver of economic growth and prosperity, and the simple fact that most small businesses remain small.”

Nearly 90% of employer businesses with paid employees – representing just under five million firms – had fewer than 20 employees in 2014 according to U.S. Census data. These firms account for 17% of all workers at companies with employees.

Moreover, employment and payroll spending in general prove to be “very unstable” according to the Chase Institute. “The reality is that most small businesses do not have a steady flow of customers and a steady flow of revenue. They have good months and bad months,” notes CEO Diana Farrell.

Creating a company is a messy and dynamic process. Small companies have smaller cash cushions and are “more likely than big companies to adjust hours or head count to meet the ebbs and flows of demand,” according to research done at the E. M. Kauffman Foundation.

Entrepreneurship has always been challenging. And the data show that it’s never been truer than it is today.